Debit and Credit Theory
& Ledger Accounts
Debit and Credit Theory
• It is fundamentally important in accounting
(and to your success in this course) to
understand the concept that every account
has two distinct sides:
ANY ACCOUNT
Left Side
Right Side
DEBIT
CREDIT
(DR)
(CR)
Debit & Credit Theory
• Debit is the word associated with the left side
of an account.
• Credit is the word associated with the right
side of an account.
• There is no deeper meaning: debit means
'left', and credit means 'right'. You cannot
move on in this course until you have
mastered debit and credit theory.
Rules of Debits and Credits
• Assets – Typically have debit balances
• Liabilities and Owner’s Equity – Typically have
credit balances
Rules of Debits and Credits
• To record changes in financial position, follow
this rule: For each type of account, record
increases on its beginning value side and
decreases on the other side
Type of Account
Beginning Value Increase
(typical balance)
Decrease
Asset Accounts
DEBIT
DEBIT
CREDIT
CREDIT
DEBIT
Liabilities and O.E. CREDIT
Accounts
The Simple Ledger
Ledger Accounts
• Businesses have far too many transactions to
complete a Transaction Analysis sheet to determine
their financial position.
• Therefore accountants developed the Account and
the Ledger.
• Account - A specifically ruled page used to record
financial changes. There is one account for each
different item affecting financial position.
T-Accounts
• T-Accounts are simple accounts shaped in a T
that are ideal for explaining accounting theory.
The formal type of account will be introduced
later
BANK
4,000
Important Features:
1. Each individual balance sheet item is given it's
own account with it's name on the top. We will
refer to them as the Cash Account, Supplies
Account, etc.
Important Features:
2. Dollar value of each item is recorded on the
first line of the account. This is the beginning
value of the account.
Important Features:
3. It is important to record the dollar figure on
the correct side of the account.
a.
Assets - left side.
b. Liabilities and Owner's Equity - right side
Important Features:
3. It is important to record the dollar figure on
the correct side of the account.
a.
Assets - left side.
b. Liabilities and Owner's Equity - right side
Together we Go!
We will work through the handout together